Tuleva funds will implement sustainability policy from the autumn

Tuleva pension funds will follow the principles of environmental sustainability and social responsibility, excluding investments in companies that do not meet the relevant criteria.

Rather than creating an additional small “green fund”, Tuleva will make its large funds more sustainable. In exactly the same way as we don’t have a single good pension fund hidden among old, high-cost funds. Low fees and an awareness of the impact of our investments on the world are core values, which it would be cynical to apply selectively.

The introduction of the principles of sustainability will not lead to an increase in fees. Tuleva’s passive investment strategy will also remain in place. We will continue to lower the fees and diversify the risks by constantly increasing our stake in the global economy. This has been shown to lay a good foundation for investors to get the most out of their savings in the long run.

Applying an ESG filter will further reduce the carbon footprint of Tuleva funds by around 15%.

Tuleva’s goal is to achieve a return as close as possible to the global market average. The application of the principles of sustainability will have a minimal impact on the performance of the funds. This impact may be either slightly positive or slightly negative.

The ESG (environmental, social, governance) filter excludes investment in companies that:

  • have 5% or more of their turnover coming from the extraction or use of energy coal or oil sands, the manufacture or sale of tobacco products or the production and sale of civilian firearms,
  • are related to the production and sale of controversial or nuclear weapons,
  • or violate the United Nations Global Compact governance principles.

In practice, this means removing almost 200 companies from Tuleva’s portfolio. We have found the necessary replacements in the model portfolio in cooperation with our partner, the world’s largest management company BlackRock.

The graph shows the weighted average CO2 intensity of the future pension funds. The year 2023 is the estimate that the indicator will reach after applying the ESG filter. Source: BlackRock

The CO2 intensity of Tuleva investors’ investments is currently 154 tonnes per 1 million US dollars of sales. Since the launch of our funds, it has fallen by around 30% due to the world’s capital moving towards less polluting industries. Thereby the market value of polluting companies falls and their share in indexes and index funds declines. For example, among our biggest investments are now technology companies instead of ExxonMobile.

Applying an ESG filter will further reduce the carbon footprint of Tuleva funds by around 15%.

Our climate footprint is likely to be already smaller than that of the large pension funds of banks. Unfortunately, we can only say this on the basis of estimates because no management company except Tuleva has so far published these figures. We hope this will change. Then people who care about the impact of their investments on the world can make decisions based on facts, not green advertisements.

Important information for Tuleva investors:

The management board of the Financial Supervision Authority approved the amendments necessary for the implementation of the principles of sustainability to the terms and conditions of the Tuleva World Stocks Pension Fund and Tuleva Third Pillar Pension Fund on 9 May 2022, Decisions No. 4.1-1/77 and 4.1-1/78. The amendments will take effect on 1 September 2022.

When fund rules are amended to a significant extent, unit-holders have a statutory right to leave the fund without paying an exit fee before the amendments enter into force.

Tuleva never charges extra fees for entering or leaving our funds. Therefore, you can leave the funds at any time without paying an exit charge. However, if you want to move your assets elsewhere just before the amendments to the terms and conditions take effect, file an application in the internet bank or Pensionikeskus by 31 July 2022 at the latest.

Documents (in Estonian):
Terms and Conditions of Tuleva World Stocks Pension Fund from 1 September 2022
Terms and Conditions of Tuleva Third Pillar Pension Fund from 1 September 2022
Prospectus of Tuleva World Stocks Pension Fund from 1 September 2022
Prospectus of Tuleva Third Pillar Pension Fund from 1 September 2022
Key Investor Information of Tuleva World Stocks Pension Fund from 1 September 2022
Key Investor Information of Tuleva Third Pillar Pension Fund from 1 September 2022
Assessment of the significance of the amendments

 

Tuleva management report 2021

The more people save capital for the future in our mutual funds, the better for all of us. The year 2021 confirmed this more than the previous years combined. While other management companies lost assets due to the pension reform, our funds increased by 150 million euros.

The regular contributions made by all of us (almost 60,000 people), more than 8,500 new investors and the rapid rise of the world’s securities markets all contributed to the growth of our assets.

The arrival of Tuleva five years ago brought the issue of high fees and poor returns to the focus of public debate in Estonia. By now, following Tuleva’s example, banks have added index funds with lower fees to their product range. I am glad that most people who have decided to switch their old high-cost pension fund for a low-cost index fund have chosen Tuleva. At the end of the year, our pension funds had twice as many assets as the index funds of all Estonian banks combined. (1)

We helped Estonia’s third pension pillar out of the doldrums. We launched our fund just two years ago. We, Tuleva investors, have invested almost as much money in the third pillar as the clients of all other management companies combined during these two years. Already at the end of 2021, our mutual fund was the largest in terms of the number of investors. In January, we outperformed the market leader, which has been operating for almost two decades, in terms of fund volumes.

All Tuleva investors will benefit from the volume growth

Global securities markets data consistently shows that low-cost funds outperform high-cost funds in the long run. Due to the increased volume of the funds, we reduced the fees even twice this year. We stay firmly among the price leaders, although being the cheapest fund at any given time is not our main goal. What is certain is that the larger the volume of our funds, the lower our fees will be in the future.

The graph shows the volume-weighted average current fees of second and third pillar pension funds by management company. Source: Pensionikeskus as of 6 December 2021.

Our low fees are not the result of a remote investor or a high-margin product covering the loss. Our low fees are based on low costs. We only spend money on things that improve the fund’s performance for the investor. Last year, the rapid growth of asset volumes made it possible to earn a consolidated operating profit of 152,000 euros in addition to lower fees.

The larger the funds grow, the higher the return for the Tuleva membership capital. Laura, a Tuleva member who contributed 1,000 euros to Tuleva five years ago and transferred both her second and third pillars to Tuleva at the earliest opportunity, has grown her membership capital by about 50% in five years. The membership capital has increased due to the growth of the global securities market (most of our membership capital is invested in our own pension fund), the membership bonus and, since last year, operating profit.

Our money is growing at world market pace

Ninety-eight per cent of our investors’ money is in two equity funds: Tuleva World Stocks Pension Fund and Tuleva III Pillar Pension Fund. The money in these funds is growing at the pace of the world market. The price of a Tuleva World Stocks Pension Fund unit has grown by an average of 10% per annum during just under five years since its launch. The world market index has grown by 11% per annum at the same time. We lag behind the index due to fees (even a small fee reduces returns!) and because there is still a small portion of bonds in our portfolio. The share of bonds has decreased to 6% of the fund’s volume. By next spring, the share of bonds will reach zero.

The unit price of Tuleva III Pillar Pension Fund has grown by an average of 16% per annum during a little more than two years. The world market index has increased by 18% per annum at the same time. The difference with the index is due to fees and the share of cash in the fund’s assets. We kept at least 5% of the fund’s assets in deposit during the start-up period to cover possible redemptions according to the fund rules. The fund’s growth allows the liquidity reserve to be gradually reduced to an insignificant size.

The graph shows the annual returns of Tuleva’s two largest pension funds compared to the returns of the world market and Estonian pension funds. Until the end of 2019, we used the MSCI ACWI stock index (73%) and Bloomberg Barclays Global Aggregate bond index (27%) as world market benchmarks, and from 2020 onwards, the MSCI ACWI stock index. We measure the return of Estonian pension funds by the change in the EPI index. Sources: Pensionikeskus, MSCI and Bloomberg.

The average return of Estonian pension funds has been 5% per annum for the past five years since the launch of our second pillar fund. In addition to high fees, the large share of bonds in Estonian pension funds reduces the returns for investors. Although the law has allowed 75% of pension fund assets to be invested in equities for more than a decade (and 100% for the past two years), management companies continue to hold more than half of the investors’ assets in zero-yield bonds (2).

Just under 2% of our investors invest in Tuleva World Bonds Pension Fund. Since the fund’s establishment in 2017, the unit price has grown by an average of 1% per annum (global bond markets have grown by 1.8% per annum and Estonian pension funds with a conservative strategy by 0.5% per annum). This return is lower than inflation and much lower than the global stock market return.

In addition, due to interest rate fluctuations, there have been periods when the fund’s performance has been negative. Last year, the value of the fund’s unit decreased by 2.2%. The performance of our fund differs from the benchmark index year by year not only because of costs but also because our portfolio contains slightly more euro-denominated bonds than the benchmark index. Due to the small size of the fund, we do not have enough low-cost funds available to emulate the global bond market.

The graph shows the annual return of Tuleva World Bonds Pension Fund compared to the global bond market index (we use Bloomberg Barclays Global Aggregate and Euro Aggregate as benchmarks with 50% relative shares each) and the average return of Estonian conservative pension funds measured by the EPI-00 index. Source: Pensionikeskus and Bloomberg.

We do not know how the world financial markets will perform in the future. The past years have been excellent for equity investors, but there will definitely be worse periods in the future. What is certain is that there is no risk-free return. Assets kept in bonds will certainly shrink due to fees and inflation. In the long run, the best way to save money is to continue to make regular contributions to a low-cost equity fund. Bonds are not suitable for long-term saving, but only for smoothing out fluctuations in the value of your pension assets in combination with shares or for short-term investing if the investor definitely plans to use their pension assets in the coming years.

Legal amendments are saving people tens of millions of euros

The legal amendments made in response to Tuleva’s proposals save Estonian people tens of millions of euros every year. The major amendments in previous years have been as follows: The state now automatically directs new second-pillar investors to a low-cost index fund, does not allow a part of second-pillar assets to be taken out as an exit fee upon switching funds, and prohibits hidden costs. The fees of pension funds have decreased 2–3 times in the past five years.

Tuleva has been fighting for several years for the state not to restrict people from using their second pillar assets in retirement. The restrictions were lifted in 2021, and nearly 30,000 people over the age of 60 could use their second pillar as they wished. In the past, they had to enter into a costly contract with an insurance company to use their assets, which we estimated reduced the return on their assets by more than one-third.

Unfortunately, the pension reform that entered into force in 2021 did not meet all expectations. We know that our funded pension system was already unnecessarily complex. Regrettably, the pension reform added even more complexity. As a result, many people who actually want to continue saving took their money out of the second pillar. We received a lot of questions from people who had withdrawn money from the second pillar and now wanted to invest it in our third pillar. There were other confusing issues.

Pension reform has taught us that we need to use more partners to work more effectively in legislation. In January, we became a member of Finance Estonia, an association of financial companies, and will participate in their funded pension working group.

We help you get through the information noise

Our blog, emails, and customer support help people navigate amid information noise and achieve their saving goals. Thanks to this, all Tuleva investors have been able to make their choices independently. No one has pulled their sleeve at a bank branch or in a shopping mall. It’s also important for keeping costs low: we don’t spend investors’ money on commissions to sales agents who solicit impulsive decisions.

People who have made an independent choice stay on course and do not jump from one fund to another: the number of people leaving our funds is several times lower than in other pension funds. On average, less than 3% of our investors leave for other funds every year. This figure is 3–4 times higher in other pension funds (3).

In the autumn, we received great recognition when the global customer support platform HelpScout recognised our customer support: we are among the 25 companies with the highest customer satisfaction score on the HelpScout platform! Pirje Keeroja performs most of our customer support work, but all other team members can also answer the investors’ questions on a regular basis.

Tuleva’s first five years have been beneficial for members, investors and Estonia as a whole. What can we do in the next five years?

Tuleva 2026: our mutual funds will amount to 2.5 billion euros, and we will have 100,000 dedicated investors

We know that most Estonians want to financially secure their future, and they know that they have to do something for it. We also know that our second and third pillar funds are the best tool for most Estonians to secure their financial future. However, most people, including those who have already started saving in Tuleva, are not saving enough.

Having good funds is not enough for people to start saving. We have a lot of work to do to get people who have already opened an account in Tuleva to start saving properly: make sure that their second pillar accumulates in a low-cost index fund, and set aside at least 10% or more of their income in the third pillar.

Even more, people have not even heard of Tuleva. How can we reach people who happen to have no higher education in finance or whose spouse or friend has not thoroughly investigated saving in pension funds?

We need to transform our current “club of the wise” into an investment company accessible to all. Over the next five years, we will help 100,000 people in Estonia save more than 15% of their income. If we succeed, the assets of our mutual funds will increase to 2.5 billion euros.

What needs to be done to achieve this?

  • This year, we will focus on existing investors: we will consistently identify and remove obstacles that prevent people from taking full advantage of Tuleva. Above all, the emphasis is on getting to know and measuring the investors and, based on that, improving content and the customer journey.
  • Next year, we will make an additional fund for those who have already made the most of the pension pillars or want to save for their children. The success of the third pillar fund cautiously gives hope that, if the needs of investors are truly met, it will be possible to do something with this product that is significantly better than the products on the market today. We will use the year to map these needs for a new product.
  • Now that the major obstacles to using pension pillar money have been removed from the law, we are focusing on removing barriers to starting saving. We will use the ongoing process of analysing the sustainability of the state pension system this year and will carry out clarification work to make third pillar contributions easier.

What will not change is that we will still focus only on people who make informed choices. We do not attract anyone to our funds with tricks, but we help people see through the information noise. The success of the third pillar gives hope that this is possible. We do not have inferior, expensive funds that we try to sell to careless customers.

And more. We will be applying a sustainability filter to our investments from this year. We care about the impact of our actions on the world, and today we have the opportunity to take one small step to make our investments less damaging to the world. We will also help the Estonian people better understand the real impact of investments on the environment. We know that the mere word “green” in the name of a fund means nothing. With all this in mind, we are keeping our investment strategy unchanged: we continue to be a low-cost index fund that aims to achieve average global market returns over the long term.

This change is currently awaiting approval from the Financial Supervision Authority. We will write more about it soon.

We established Tuleva to invest our retirement assets better. Tens of thousands of people have joined us over the past five years, believing that together we can achieve a better future. In the next five years, we will make Tuleva work in a way that will significantly increase the volume of capital saved by the Estonian people.

Happy saving!

Tõnu Pekk
Tuleva founder and fund manager


Based on Pensionikeskus statistics on second and third pillar funds, Tuleva calculations as of 6 December 2021.
Source: Statistical review by the Ministry of Finance.
You can find statistics on switching second pillar funds on the Pensionikeskus page.

Retirement age is approaching: How should you use the assets accumulated in your pension pillars?

After Parliament lifted restrictions on the use of the second pillar, the assets you accumulated in the second and third pillars are really yours. You can use them as you wish; you can take them out all at once or pay yourself a pension supplement every month. You can also keep your assets growing in the fund. What should you know to make the best decision?

This blog post and guide are based on our live show with Kristi Saare, chairman of the Tuleva supervisory board, on 7 April 2021. Tuleva members Taavi Pertman and Kristjan Lepik helped us think about the choices for the show, and our office manager, Pirje Keeroja, gathered feedback and members’ questions. You can watch the show here (in estonian):

What options do you have?

If you are 60 years or older (60 is currently early retirement age), you can do the following with the pension pillars:

1. Continue to save: money will continue to grow in the pension fund.

No age obligates you to take out your pension pillars. Nor does receiving a state pension mean you have to use your second or third pillar. If you work, regardless of age, a part of your salary and social tax will continue to go to the second pillar, and you can still contribute up to 15% of your income to the third pillar and receive an income tax refund on it.

Pension fund units can be inherited. When you are no longer with us, your heirs will receive your pension fund units in their pension accounts, or they can withdraw them in cash (20% income tax will apply in the latter case). You don’t have to file applications for bequeathing your fund units.

2. One-time payout: you take out all the accumulated money at once.

When you reach early retirement age, you can take out all or part of the money accumulated in your second or third pillars at any time (1). To do this, you need to submit a one-time disbursement application through Pensionikeskus or your internet bank, and the money will be credited to your bank account as follows:

  • from the second pillar by the 20th day of the following month;
  • from the third pillar within four working days of the application.

Upon payment, Pensionikeskus withholds 10% income tax. The amount paid does not count towards your taxable income or affect the amount of your tax-free income.

IMPORTANT! Any withdrawal application will permanently terminate your second pillar contributions (both the 2% from your salary and the 4% that the state contributes from the social tax paid on your salary). You can continue making contributions to the third pillar even if you are already withdrawing money from the third pillar at the same time – you will still receive an income tax refund.

3. Funded pension: you can take out the accumulated money as a monthly pension supplement.

You can draw a monthly pension supplement from the second and third pillars by submitting a funded pension application at Pensionikeskus. Unlike your state pension, the funded pension will not be paid until the end of your life but, rather, until the agreed term. Should you die earlier, your heirs will receive the remaining amount. If you live longer, you will have to live on a state pension or other assets after the end of the funded pension.

The amount of the funded pension changes over time, according to changes in the unit price of your chosen pension fund. This means that your remaining assets in the second and third pillars will continue to earn income in the fund (or losses in the event of a market downturn). Funded pension payments are exempt from income tax if your funded pension agreement is long enough – for example, at least 18 years if you sign the agreement at age 65 (2).

This is how simple your options are (3).

How should you decide?

In the past, the government’s idea was to very precisely prescribe how people should use the assets accumulated in the pension pillar. We believe that when a person has reached 60, they probably know better for what purpose they use their accumulated assets.

Here are a few questions that may help you decide.

*You can find the expected amount of your first pillar pension in the calculator on eesti.ee. NOTE! See only the amount of the first pillar pension.

Should you switch pension funds as you approach retirement age?

Management companies usually advise investors to move their assets to a conservative bond fund as retirement age approaches. Other pension funds invest a large part of their assets in stocks and generally offer much higher returns, but their unit price also fluctuates more. When markets fall, you will not have time to wait for market recovery before you retire.

When choosing a fund, always keep in mind that low-cost funds usually achieve better returns than high-cost funds.

Nobody likes it when the value of the assets they have accumulated over the years suddenly falls by 10, 20 or even 30%. Unfortunately, the risk-free rate of return today is 0%, and what’s worse, inflation reduces the purchasing power of a zero-return investment every year.

The graph shows what happens with the purchasing power of 10,000 euros in a pension pillar over the years when inflation is 2% per annum. The stock market return and risk-free return are assumed to be 5% and 0% per annum, respectively. Remember that the stock market return is not guaranteed and can be negative for several years in a row.

In conclusion, neither science nor the best experts can give a clear answer as to the right investment strategy or the most suitable pension fund for investors nearing retirement age. Then how can you decide?

  1. If you have reached your target amount and plan to withdraw money from the pension fund in a year or two to make your dream come true, then it’s perhaps better not to take any more risks. Fluctuations in the stock markets can thwart your plans. Move the accumulated second and third pillar assets to a bond fund, and you can be sure that when you withdraw the money after a few years, you will not be in for an awful surprise.
  2. If you don’t plan to withdraw all the money in the near future or instead want to leave it to your children, consider keeping the assets in stocks. This way, your children’s inheritance is more likely to grow larger over the decades.
  3. Most future retirees don’t yet know exactly when they will stop working or how much money they will need every month. Your working career can end for reasons beyond your control, for example, if your health fails or your employer decides to give up your services. Experts advise those approaching retirement age to keep at least one year’s expenses worth of assets in a rainy day fund – one where money can be withdrawn at any time and where its value does not fluctuate, i.e. a bank deposit or a conservative pension fund.

When choosing a fund, always keep in mind that low-cost funds usually achieve better returns than high-cost funds. Fees play an especially important role in the case of funds with a conservative strategy; in funds with higher fees, the value of your assets is quite certain to decrease in the coming years. Therefore, leave any fund that has fees higher than 0.5% per annum! You can find a comparison of fees here.

 

(1) As the pension reform was quite rushed, a few ways to use the money are still technically unavailable this year. In 2021, money can be withdrawn from the second pillar only in full and not in part. Also, it is impossible for technical reasons to withdraw third pillar money in 2021 through a funded pension. It will be possible in 2022.

(2) A sufficiently long term is one that is longer than your average life expectancy. According to Statistics Estonia, this means that if you are 65, your remaining life expectancy is still 18 years. In other words, if you at age 65 sign a funded pension agreement for at least 18 years, your income tax will be 0%, whereas, for a shorter agreement, it will be 10%.

(3) The law also allows you to take out a lifelong or fixed-term insurance contract for receiving your second or third pillar pension. Unfortunately, the fees of insurance contracts are currently so unreasonably high that insurance contracts are not even worth mentioning as an option. There is no reason to keep your pension assets at an annual cost rate of more than 1%.

Tuleva 2020 management report

I have a good feeling as I’m writing this report. 2020 was a great year for us. It seems to me that all our previous years’ work has really borne fruit last year, thanks to some supportive external events.

Most people save less than they would like. Tuleva connects with people who want to improve their saving behaviour. Together, we will find ways to overcome the obstacles and start saving today. Our pension fund expenses are 50% to three times lower than those of banks’ larger pension funds. This ensures that the income earned by the savings goes to us and not the intermediary (1).

In 2018 and 2019, we had 3,000 and 8,000 new pension savers, respectively. While in 2020, as many as 34,000 people joined Tuleva to start saving with us. This means that 51,662 people are now saving in our second and third pillar pension funds. It’s particularly gratifying that most of the newcomers joined the voluntary third pillar. I believe these are the first voluntary long-term savings for most of them.

Business plan and fees

When I drafted a business plan for Tuleva five years ago, I added a note to the model that a first reduction in fees might be considered in 2022. In fact, when first launching the funds in March 2017, we already used lower fees than envisaged in the business plan. By now, our pension funds have reached 250 million euros, and I am very pleased that our supervisory board has decided to reduce fees.

Why is reducing fees so important when our funds already have the lowest management fees? There is a simple principle behind this – if at least one lower-paid index fund were available to our members, it would make sense for all of us to transfer our assets there and close our fund. There is no point in paying a higher price for the same product.

Real life doesn’t always offer us such clear choices. Following the example of Tuleva, banks have also included low-fee index funds in their product range. And the theoretical range of low-cost options will likely increase when using the pension investment accounts (see the section on pension reform below). Unfortunately, the bank’s website or sales rep will not direct you to a low-fee index fund but an old, actively managed high-fee fund.

Therefore, the inclusion of the first lower-priced fund in the selection does not mean we will recommend our members transfer their savings there immediately. Nor does it mean that we should reduce our fees to a level where we start losing money as the fund manager. However, when making plans, we always keep in mind that our common goal is to provide the best saving opportunities for all of us. The best opportunity might not necessarily be provided by a fund managed by ourselves.

Investing and the environment

I believe that now that we have a larger number of knowledgeable savers, it’s time to start tackling more complex issues. For example, how our pension money affects the world’s climate problems and whether our money is invested in ethically operating companies. It’s easy to point the finger at someone and blame banks or large corporations, forgetting that we, as unit-holders in pension funds, are all indirect co-owners of these companies.

The social and environmental impacts of investing, and a responsible consideration for these, are complex and often controversial issues. It’s even more difficult to reach a consensus together on what principles we should follow in our own funds. It would certainly be easier to offer a range of products and label one of them ‘green’ or ‘sustainable’ and leave the choice to each client.

However, this leads to a semantic contradiction: if one of our funds is ‘sustainable’, then by implication, the rest should be unsustainable. After all, we started Tuleva to tackle the problems together that each of us could not tackle on our own. We are also doing our best to reduce the carbon footprint of our joint investments and improve the social impacts.

We approached the sustainability issue in 2020 the same way we approached the fund management fees in 2017: we tried to assess the current carbon footprint of our pension funds unambiguously and compare it to other pension funds and the global average.

One of the most common indicators for assessing the carbon footprint of an investment is the weighted average emission intensity of the companies in the investment portfolio. As of the end of 2020, the weighted average carbon footprint of the companies in the portfolio of the Tuleva World Stocks Pension Fund and Tuleva III Pillar Pension Fund was 156 tonnes of carbon dioxide per USD 1 million sales turnover. The figure for the companies in the Tuleva World Bonds Pension Fund portfolio was 100 tonnes. As our portfolio closely follows the global average, our carbon footprint is also exactly equal to the weighted average of global listed companies (2).

This figure has fallen significantly since the launch of Tuleva pension funds four years ago. Why? Many oil producers and other Old World polluters have disappeared from among the world’s largest listed companies (and from the largest investments in our fund’s portfolio). They have been replaced by electric car manufacturers, renewable energy companies and others. The investment world is moving towards more environmentally conscious investments, and we are automatically moving with it – that’s what passive investing means.

Other pension funds are not disclosing their carbon footprint yet. According to my calculations, Tuleva pension funds have an even smaller carbon footprint than, for example, LHV’s Green Pension Fund or Estonia’s largest pension fund, Swedbank’s K60 (3). I very much hope that measuring the carbon footprint will soon become the norm in pension funds and that the requirement for disclosure will become statutory. The same way it has already happened with the total expense ratio of funds.

Clear and comparable data is the first step in deciding how to contribute to solving, or at least not exacerbate, global climate problems through our investments. It would be a good idea to base a decision on facts and not on a progressive-sounding fund name or a vague responsible investment policy document published on the management company’s website.

Pension reform

When summing up 2020, we should definitely talk about the pension reform, which was on the agenda of both the Riigikogu and the Supreme Court.

Here is a short summary of the pension reform:

  • When you reach retirement age, you no longer have to give the assets in your second pillar account to an insurance company, but you can decide for yourself how to use these assets. According to the new law, this right arises in the early-retirement age (five years before the official retirement age). Remember that you have no obligation to withdraw money at the earliest opportunity; neither is there any tax advantage in doing so. You can do it at any time, starting from the early-retirement age, under the same conditions.
  • In the future, you can save in the second pillar also through an investment account by purchasing yourself stocks or investment funds.
  • You can leave the second pillar at any time and withdraw the accumulated funds.

Although the last point in the pension reform was the most discussed and controversial, the first one is the most important. We have been fighting for several years for the free use of money during retirement and have submitted proposals with thousands of signatures to the Riigikogu. This change (which, incidentally, was eventually agreed to by all the major political parties) increases the freedom of choice and brings great financial benefits to all investors – insurance contract costs and fees have consumed an estimated one-fifth to one-third of people’s pension assets until now.

What should you do in the context of the pension reform? Tuleva clients need not do anything. After all, we already reformed our pension pillar a few years ago and created a pension fund where it is wise to save regardless of whether saving is compulsory or voluntary.

The government transfers a portion of the social tax to the second pension pillar every month. Therefore, this is the best method of saving available to us. I was quite puzzled by the discussion about which was better – the first or the second pillar. The money in a second pillar pension account is a real asset to the saver (as also confirmed by the Supreme Court), which they can withdraw at any time. This is surely better than a promise, contained somewhere in the government`s first pillar pension accounts, that you will receive a few more euros of first pillar pension sometime in the future.

The only people who should act in light of the pension reform are those who already have a pension contract with an insurance company to receive second pillar payments. Such contracts can be cancelled until 31 March, in which case the balance of the contract will be paid.
Of course, the pension reform may also affect the financial results of our joint business – the Tuleva fund management company. Although continuing to save is the most sensible step for most of us, I cannot say today how many of the savers in our funds will decide to leave the second pillar. We will keep an eye on the developments this year and, if necessary, adjust our business plan.

The future

Before we discuss future plans, let’s summarise what we have achieved in the first five years of operation.

We started from the second pillar because most of the working people in Estonia save money in the second pillar, and most of their financial assets are in the accounts of that pillar. At the same time, second pillar savers used to be able to only choose from among some of the worst-performing pension funds in the world.

Our achievements to date
  • Every second pillar saver can now choose a good, low-cost index fund.
  • Following Tuleva’s example, LHV, SEB and Swedbank have also introduced an index fund with a reasonable fee.
  • The government no longer directs young peoples’ pension contributions to bond funds whose fees exceed real yields. At the beginning of their working careers, people who haven’t chosen a pension fund for themselves are now directed to a low-cost index fund.
  • The Riigikogu finally decided to remove detrimental restrictions on using second pillar assets in retirement.

These are not trifles. Thanks to these, most Estonians can be expected to benefit two to three times more than before from every euro saved in the second pillar.

This is not the limit for Tuleva. We can make our pension funds even better. We can continue to work to ensure that Estonian laws protect people’s interests even better. We can help our members save more money in a smarter way – if your second pillar is sorted out, it is wise to start investing in the third pillar.

By choosing a low-cost second pillar fund, the average investor will easily save more than 10,000 euros in fees over their lifetime (4). But the second pillar alone is not enough to live well in the future. We save only 6% of our salary in the second pillar. For example, Finns and Swedes set aside at least one-fifth of their wages.

Only every tenth working person currently invests in the third pillar, saving on average just 3% of their wages. There are 100,000 third pillar savers in Estonia, and we save less than 100 million euros a year. If we saved like the Finns, we would have 600,000 savers and 2 billion euros a year.

In 2019, we launched a third pillar pension fund with the lowest fees in Estonia. A typical investor saves 10% of their salary in our third pillar (5). This rate could go up. In addition, tens of thousands of new savers joined our fund in November and December, and they too must be helped to achieve at least an equivalent saving habit and pace.

Now about our specific goal. In 2021, the volume of our third pillar fund should double (to 60 million euros). We should continue to add enough new savers to the second pillar with each changeover period, so that by January 2022 our funds would reach 300–350 million euros.

Tuleva’s important additional goals:

  • We will continue to build a dynamic team at Tuleva. In addition to three full-time and one part-time employee, our team includes top experts involved in various projects: developers, designers, lawyers and others. An office manager and a part-time compliance officer will join us in January. We only hire highly qualified people, we pay them a good salary and provide a flexible and learning-friendly work environment. We create and implement a system for more efficient organisation of the distributed team’s work and for taking on new team members.
  • We continue to automate operations and make them more efficient and risk-proof. We find at least one way to further optimise our work processes every quarter.
  • I wrote more about Tuleva’s ecological footprint above. In 2021, we will map Tuleva’s opportunities and challenges in implementing a responsible investment policy and make relevant proposals to the supervisory board.
  • We will continue to raise awareness to help people overcome one of the most important obstacles to the consistent implementation of a smart investment plan: information noise in the financial sector driven by competing sales tactics. We analyse the efficiency of our communication work and optimise the processes of customer support, member communication and other communication activities.
  • As the only organisation representing pension investors in Estonia, we will continue to work to improve the laws governing pension investments. In 2021, we are aiming to eliminate double taxation on third pillar contributions exceeding the set limit. We will naturally continue to protect savers’ interests in the ongoing pension reform.

We are doing this so our members will have excellent opportunities for long-term savings in the future. We also consider the possibility that events beyond our control (whether political developments related to the second pillar or, for example, Vanguard’s entry into the Estonian market with super-low-cost pension funds) may make our own fund management unnecessary or economically meaningless for our members. These scenarios will not damage the assets of Tuleva pension savers. We have mapped these to help members and our other savers find the best choices even if the mentioned scenarios come true.

There is one thing we will not do in 2021. Together with the third pillar fund, we planned to develop an additional saving product for those whose third pillar is already full or who earn income as entrepreneurs. We will not offer such a product in the coming years, because Vanguard’s broad-based exchange-traded index fund (ETF) with an expense ratio of less than 0.5% is already available in the market through LHV’s Growth Account and Swedbank. The only way we could offer a similar product would be launching a new fund and obtaining a UCITS management company license. We certainly won’t be able to offer such a product at a substantially lower cost.

Happy saving!

 

(1) The total expenses of all pension funds can be easily compared on the Estonian Pensionikeskus website.
(2) I used the BlackRock sub-funds end of November reports to assess the footprint of our portfolio.
(3) I chose these two funds for comparison because their management companies have presented these as funds with a very environment-friendly portfolio. You can see my calculations here.
(4) View and calculate using the calculator on our home page.
(5) The calculation is based on investors who have saved in the fund for at least six months.

Why doesn’t Tuleva speculate on market sentiment?

There are two types of investors. Those who buy stocks for a long term to take part in the companies’ growing profits. And others that buy and sell often, hoping to take advantage of temporary market deviations.

Tuleva has chosen the first path – our joint pension fund is a passive, consistent investor with a long-term outlook.

Banks’ old funds are of the second type – they catch fleeting moments by active trading and try to discover undervalued stocks. This is very difficult – so far, Estonian fund managers have not managed to outwit the market. LHV and Nordea funds have performed slightly better than those of Swedbank and SEB, but the growth of Estonian people’s assets in all of them has been below the world average since the launch of the second pension pillar.

That’s why Tuleva members decided to use a different approach to ensure long-term growth. Let’s take a closer look at what makes our joint pension fund different.

What does a Tuleva pension fund do?

Most Tuleva members invest their second pillar savings in the Tuleva World Stocks Pension Fund and their third pillar in Tuleva III Pillar Pension Fund. By saving in this way, we simply take a piece of our salaries every month and increase our stake in the world’s largest companies (1). Then we wait and let economic growth do its job. As companies grow, they make more profits and pay more dividends. That’s it.

 

Tuleva stock portfolio in February 2021.
Where does Tuleva invest?

We gradually increase our stake in all the world’s largest listed companies. Today (19 February 2021), as savers in Tuleva pension funds, we already have:

  • 62,734 Apple shares worth €8.15 million;
  • 26,096 Microsoft shares worth €6.29 million;
  • 1,561 Amazon shares worth €5.07 million;
  • 2,185 Alphabet shares worth €4.59 million;
  • 8,862 Facebook shares worth €2.32 million;
  • 2,732 Tesla shares worth €2.13 million;
  • 90,502 Taiwan Semiconductor shares worth €2.11 million;
  • 21,612 Tencent shares worth €2.07 million;
  • 6,965 Alibaba shares worth €1.84 million;
  • 11,163 JPMorgan shares worth €1.65 million;
  • 9,857 Johnson & Johnson shares worth €1.61 million;
  • 18,131 Samsung shares worth €1.35 million;
  • 2,229 NVidia shares worth €1.33 million;
  • 4,239 PayPal shares worth €1.22 million;
  • 6,623 Walt Disney shares worth €1.22 million;
  • 5,941 Visa shares worth €1.22 million;
  • 4,934 Berkshire Hathaway shares worth €1.19 million;

We also have smaller holdings in 2,945 other companies with a total value of €184 million. All this together makes up 85% of our funds’ assets.

As the law did not allow us to invest more in stocks, we invested about a quarter of the money very conservatively in governments until the end of 2019. We bought U.S., Japanese, French, Italian, German and 16 other countries’ government bonds. From the beginning of 2020, we will no longer buy bonds and will gradually replace bonds with stocks over three years.

Next month, we will buy more stocks. And again the next month. And so on all the time.

Why do we gradually buy stocks of all the largest companies in the world?

Because we want to partake in the profits of companies that drive the world economy today and in the future.
Only in this way can we be sure that our wealth will grow with the world economy and will not depend on the well-being of any single region or economic sector. The more diversified the portfolio, the lower the risk.

In the words of Jack Bogle, founder of Vanguard Index Funds, which has brought wealth to millions of people through passive investment: “Don’t look for the needle in the haystack. Just buy the haystack!”

This does not mean that the market value of our assets will always go up. Stock markets are cyclical – a fall follows a rise and a rise follows a fall. Temporary euphoria in the markets, storms lasting weeks or months, or even years of depressions are of little importance to us. After all, our goal is to consistently set aside as much as possible by the time we reach retirement age. The fluctuations in the meantime do not interest us.

What if the economy crashes?

When the world economy is in recession and stock prices fall, the market value of companies and, with it, the value of owners’ assets, including ours, will decline. It’s not pleasant, but all you need is perseverance to stay on course.

Because, as the economy grows and prices rise again, our assets will rise too.

In the history of securities markets, stocks have always brought good returns to those investors who haven’t panicked in bad times but have had the patience to wait for good times. This is easy to do with the pension pillar, as there is no need to sell your investments before you reach retirement age.

How much return can I expect in Tuleva?

In Tuleva, we assume that the future of the world economy is unpredictable. Tuleva fund manager Tõnu Pekk cannot promise anyone that our assets will definitely grow 5% or 10% a year or exceed the growth of any other pension fund. True, bank fund managers haven’t had much luck trading so far, but maybe they will in the future?

However, unlike the banks’ old funds, we can be sure in Tuleva that the growth of our assets will never lag far behind the average of world markets. Therefore, we invest in the growth of the world’s companies and not in a speculative hope that our fund manager will, again and again, predict events that take other investors in the world by surprise.

More than 50,000 wakeful Estonian people are already saving in Tuleva. Join us if you like our investment philosophy.

Indrek Neivelt:

Why is my second pillar in Tuleva World Stocks Pension Fund?
“First, Tuleva belongs to pension savers themselves. Second, I think that when investing with a longer-than-ten-year horizon, an index fund of mostly stocks is the best choice. I can’t guess how a particular company or industry will develop. But I am sure that at least the Asian and African economies will grow and central banks will print more money. If you believe the same, Tuleva is the best place to save for retirement.”

 

(1) Most Tuleva members save in our equity funds – this is suitable for people who have at least 10 years left till retirement. For those who have a few years left to retirement, Tuleva World Bonds Pension Fund, which buys only bonds in the same peaceful way, may be a better choice. The detailed investment process of our funds is described in the fund documents. You can find them here: Tuleva World Stocks Pension Fund, Tuleva III Pillar Pension Fund and Tuleva World Bonds Pension Fund.

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